Questions -
(1) Shock Electronics sells portable heaters for $43 per unit, and the variable cost to produce them is $26. Mr. Amps estimates that the fixed costs are $100,300.
(a) Compute the break-even point in units.
(b) Fill in the following table (in dollars) to illustrate that the break-even point has been achieved.
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Sales
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Fixed costs
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Total variable costs
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Net profit or ( loss)
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(2) Air Purifier Inc. computes its break-even point strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $2,520,000, but 20 percent of this value is represented by depreciation. Its contribution margin (price minus variable cost) for each unit is $54. How many units does the firm need to sell to reach the cash break-even point? (Round your answer to the nearest whole number.)
(3) a. Calculate the profit or loss (EBIT) on 12,000 bags and on 25,000 bags
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Bags
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Profit / Loss
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Amount
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12000
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25000
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b. What is the degree of operating leverage at 20,000 bags and at 25,000 bags? (Round your answers to 2 decimal places.)
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Bags
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Degree of Operating Leverage
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20000
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25000
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c. If United Snack Company has an annual interest expense of $34,000, calculate the degree of financial leverage at both 20,000 and 25,000 bags. (Round your answers to 2 decimal places.)
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Bags
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Degree of Financial Leverage
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20000
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25000
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d. What is the degree of combined leverage at both a sales level of 20,000 bags and 25,000 bags? (Round your answers to 2 decimal places.)
(4) International Data Systems' information on revenue and costs is relevant only up to a sales volume of 107,000 units. After 107,000 units, the market becomes saturated and the price per unit falls from $18.00 to $10.80. Also, there are cost overruns at a production volume of over 107,000 units, and variable cost per unit goes up from $9.00 to $9.25. Fixed costs remain the same at $57,000.
a. Compute operating income at 107,000 units.
b. Compute operating income at 207,000 units.
(5)
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Unit Sold
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Total Variable
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Fixed Costs
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Total Costs
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Total Revenue
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Operating Income loss
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100000
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300000
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90000
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390000
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600000
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210000
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120000
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360000
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90000
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450000
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720000
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270000
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The top row of the table has the beginning values and the bottom row of the table has the ending values.
a. Compute the degree of operating leverage (DOL) based on the formula below. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
DOL = Percent change in operating income/Percent change in units sold
b. Re-compute DOL using the formula given below. There may be a slight difference due to rounding. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
DOL = Q(P - VC)/Q(P - VC) - FC
Q represents beginning units sold (all calculations should be done at this level).
P can be found by dividing total revenue by units sold.
VC can be found by dividing total variable costs by units sold.
(6) The capital structure for Cain Supplies is:
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Cain Supplies
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Debt @ 10%
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$260,000
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Common stock, $10 par
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520,000
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Total
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$780,000
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Common shares
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52,000
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Compute the stock price for Cain if it sells at 17 times earnings per share and EBIT is $82,000. The tax rate is 30 percent.
(7) Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the production of brick for the homebuilding industry. Their financial information is as follows:
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Sinclair
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Boswell
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Capital Structure
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Debt @ 12%
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$1,320,000
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0
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Common stock, $10 per share
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880,000
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$2,200,000
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Total
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$2,200,000
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$2,200,000
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Common shares
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88,000
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220,000
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Operating Plan:
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Sales (62,000 units at $25 each)
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$1,550,000
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$1,550,000
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Variable costs
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1,116,000
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744,000
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Fixed costs
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0
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312,000
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Earnings before interest and taxes (EBIT)
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$434,000
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$494,000
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The variable costs for Sinclair are $18 per unit compared to $12 per unit for Boswell.
a. If you combine Sinclair's capital structure with Boswell's operating plan, what is the degree of combined leverage?
b. If you combine Boswell's capital structure with Sinclair's operating plan, what is the degree of combined leverage?
c. In part b, if sales double, by what percentage will earnings per share (EPS) increase?
(8) Dickinson Company has $12,100,000 million in assets. Currently half of these assets are financed with long-term debt at 10.5 percent and half with common stock having a par value of $8. Ms. Smith, Vice President of Finance, wishes to analyze two refinancing plans, one with more debt (D) and one with more equity (E). The company earns a return on assets before interest and taxes of 10.5 percent. The tax rate is 40 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable.
Under Plan D, a $3,025,000 million long-term bond would be sold at an interest rate of 12.5 percent and 378,125 shares of stock would be purchased in the market at $8 per share and retired.
Under Plan E, 378,125 shares of stock would be sold at $8 per share and the $3,025,000 in proceeds would be used to reduce long-term debt.
a. How would each of these plans affect earnings per share? Consider the current plan and the two new plans.
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Current Plan
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Plan D
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Plan E
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Earnings per share
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b-1. Compute the earnings per share if return on assets fell to 5.25 percent.
b-2. Which plan would be most favorable if return on assets fell to 5.25 percent? Consider the current plan and the two new plans.
- Current Plan
- Plan D
- Plan E
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Current Plan
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Plan D
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Plan E
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Earnings per share
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b-3. Compute the earnings per share if return on assets increased to 15.5 percent.
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Current Plan
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Plan D
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Plan E
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Earnings per share
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b-4. Which plan would be most favorable if return on assets increased to 15.5 percent? Consider the current plan and the two new plans.
- Current Plan
- Plan E
- Plan D
c-1. If the market price for common stock rose to $10 before the restructuring, compute the earnings per share. Continue to assume that $3,025,000 million in debt will be used to retire stock in Plan D and $3,025,000 million of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 10.5 percent.
c-2. If the market price for common stock rose to $10 before the restructuring, which plan would then be most attractive?
- Plan E
- Plan D
- Current Plan